How to forecast through inflation: three tips for private companies
October 14, 2022
Private companies can get hit harder during times of high inflation because they often don’t have the same purchasing power as large companies due to lower volumes. They are more impacted by rising supply chain and labor costs that can be difficult to pass on to consumers. In addition, it can be harder to borrow money when interest rates go up. Many private companies increase their value with high growth trajectories, but growth takes working capital cash and higher interest rates could render that financing option nonviable.
Inflation is likely to continue and can be harder on private companies
Since 2010, with the exception of 2020 COVID contraction, the economy has consistently expanded at an average of 2.1%. In 2021, the US economy had 3.7% inflation. The only time we’ve had higher inflation in the last 30 years was in 2007 when it hit 4.1%. According to PwC’s latest Pulse survey, private companies have a more pessimistic view of the economy, with 80% citing it likely that inflation will remain elevated (versus 62% overall) and 84% saying a recession is likely (versus 60% overall).
Inflation is likely to remain high over the next few years and could be similar in numbers to the inflation era of the 1970s and 1980s. But the reason for the inflation now is different than it was then. We’re looking at inflation driven by the volume of money in the economy.
It’s likely that as a private company leader today, you have never navigated your company through an environment like this before. Having a plan for how to respond to the different scenarios that could occur over the next few years will best position your company to survive the upcoming uncertainty and thrive through greater scalability and market share.
Three ways to survive through inflationary times
You can navigate these uncertain times by gathering information about your business, knowing the impacts of your company’s decisions and executing quickly. Although one-time evaluations can be done, the most effective and efficient approach is to have ongoing, accurate, and predictive management reporting supported by the appropriate technology tools and a well trained team. This doesn’t require a huge investment or a digital transformation. Any company, regardless of size, has the ability to implement the following "survive-and-thrive" strategies.
1. Know what works
Take a good look at your business to understand costs and profitability drivers, both internal and external. Determine which products and services perform best and understand how cost increases or supply chain disruptions might impact your ability to deliver those offerings. Assess your customers to ascertain which are most profitable and create plans to create loyalty within that group. Be prepared to let go of products or customer segments that aren’t profitable or might be negatively impacted by inflation-related challenges.
For example, evaluate not only customer demand but also fully loaded profitability by service / product and customer to determine investment areas. Determining the products and services in highest demand is a strong business strategy, but focusing on what customers are willing to spend their money on, especially when their dollar doesn’t go as far due to inflation, will help your company understand how to prioritize your expenses and whether it makes sense to pass along a price increase to those customers. Also being more alert to competitor pricing and methods to drive additional market share will be a key strategy in select markets.
2. Forecast the possibilities
Have a view of what you’re going to do as external conditions change. For high inflationary times, scenario modeling is the best way to forecast. Right now, we’re looking at three likely scenarios for the next few years:
- Sustained high interest rates
- Inflation stays low, higher interest rates
- Interest rates go too high, deflation / stagflation
Determine how your company could be impacted by each of these scenarios and create plans for how to respond to each one. Evaluate things like customer growth, vendor raw materials, labor costs, cost of capital and customer loyalty. Understand the levers and to what degree they can be pulled. Update planning models to have inflation adjustments by category and create contingency plans for scenarios. The real key is going to be increasing free cash flow during the recession to be best positioned for the recovery. Additionally, understanding the timing of both recession and recovery is critical to cash planning.
3. Don’t wait - get moving
Many private companies can execute new strategies quickly, without much of the bureaucracy that public companies deal with. Once you understand the most likely scenario that will occur, start to make changes to the business today.
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